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Planning a new look?

04 September 2008 by

When you get your hands on a property - be it a hotel, pub, restaurant or guesthouse - you will most likely need to do some work to it to get it looking and feeling right. Maybe the property is in need of some looking after perhaps you will need to change the look and feel of the place to fit in with your business model and brand design or maybe you have grander plans to alter the design and layout of the building - in which case you will need to consult your local planning officer to ensure you comply with building regulations and planning laws.

When making improvements to a property, a key consideration is what effect they will have on the value of the business. This is especially important if you do not own the freehold. If you have a tenanted pub business, for example, you may be able to boost trade by making improvements but you will not benefit financially when your term comes to an end. And with leasehold businesses, if you improve trade you could even be stung with an increased bill when it comes to your rent review. Check your agreement before you invest in the property and keep accurate records of any investment made, if only for tax reasons.

Do your homework

Stephen Page, a director at property agency Colliers Robert Barry, advises first-timers to spend a little time to settle and consolidate before making changes. Look at what can be reused or simply touched up, rather than replaced. Also, take time to develop a business plan, employing the services of a quantity surveyor to help cost out the project, and then stick to it. "If you don't stick to the plan, as sure as eggs is eggs, the bills will go up," he says.

The point is echoed by Graham Morgan, partner in charge of corporate and business tax at chartered accountants Kingston Smith. He says that too often people spend without thinking, throwing their budgets out of the window, and end up over-borrowed.

"There's a lot of emotion, especially in the private hotel sector, and some people find it hard to separate emotion from hard commercial reality," Morgan says.

Doing thorough research is especially important if you are looking at changing the market positioning of the property, Page says. Make sure that your proposition is right for the market and your guest profile and your figures stack up - for example, will you be able to charge more for refurbished hotel rooms? And if you have big plans, don't cut corners by trying to do it all yourself. A professional design team will be able to bring experience and knowledge and help you see how your ideas would translate in the finished product.

Having a strong business case for a project will naturally help you secure the necessary funding from a lender - and on better terms. Some ideas are easier to develop a strong business case for than others. For example, if you take over a tired, wet-led boozer, adding facilities for smokers, such as a covered shelter, and thinking of ways to build up the food side of the business would be obvious ways to boost trade.

Building regulations and planning permission

Part of the research and planning stage is to look at areas such as energy efficiency and accessibility, factoring in compliance with key legislation such as the Disability Discrimination Act (DDA) from the outset.

All new building work must comply with the Building Regulations, which ensure that new buildings and alterations meet standards in areas such as fire safety, accessibility and drainage and ventilation. Consult the Building Control office (BCO) at your local authority for more information.

In contrast, the planning system deals more with the type of projects that are permitted and prohibited in a given area and attempts to govern the overall make up of communities. As such, a building project may require approval from both systems. Planning permission, or at least BCO approval, will be required for any major structural changes to the interior and for all but the smallest of changes to the exterior and frontage.

Planning permission may also be needed should you decide to change the use of the property - for example, from a care home to a hotel. A key early consideration is to ascertain what use class your property has under the Use Classes Order, as some changes require no planning application.

Applying for planning permission can be a major headache for hospitality operators, especially if the property is listed or in a conservation area. Start thinking about it when viewing properties. Consult your local authority's unitary development plan (UDP) and research recent developments and planning applications in the area to find out what kind of changes and alterations they are willing - and unwilling - to approve. And contact your local planning officer as soon as possible, preferably before you buy.

If issues do arise but you are still keen to press ahead, seek advice from a planning expert such as a chartered surveyor who can improve your chances of getting approval. Whatever you do, don't be tempted to progress without gaining planning permission.

Shout about it

Another issue to consider is PR and marketing. Think about how you could use the refurbishment to help promote the business. For example, contact old customers, advertise the changes in the local community and contact the local or even national press. If done well, former customers will queue up to find out what you've done with the place.

How to approach a Hotel Refurbishment

By the project management department at Colliers CRE

1) The brief

Spend time on the initial design stage. This will help deliver reliable programme and budget costs and get the best out of your design team. The brief can be prepared by your project manager.

2) The building

Get a full survey carried out on the fabric, structure and services of the hotel and don't ignore anything it highlights. If your budget won't stretch to everything, tackle health and safety items and areas that will have a direct effect on your customers' comfort or hotel operations first and factor the rest into the long-term maintenance plan of the hotel.

3) The budget

Ensure your figures are realistic by appointing sector-aware consultants, such as a chartered quantity surveyor. If initial projected build costs are higher than you expected, reconsider how important each item of work is to the operation of your hotel.

4) The programme

Allow enough time for your project to be properly planned and managed during the pre-contract phase and don't try to squeeze the programme down. If the design team and building contractor are comfortable with the proposed programme, you should be able to rely on the dates provided for letting rooms - but expect the unexpected.

5) The cost

Conclude the detailed design process in order to achieve as much cost certainty as possible before construction. Don't make significant design changes once the works have commenced, as these will lead to increased costs and delays.

6) The design team

Consider what type of design team you require - light refurbishments may require only the input of a good interior designer.

7) Legal documents

Ensure that legal documents are completed and in place as soon as you can: this will limit the possibility of misunderstandings over payments and responsibilities. And lay out a fair and reasonable abortive strategy should you decide not to proceed to construction stage. A building contract for the smaller projects (eg, JCT Minor Works or Intermediate Building Contracts) will minimise the risk of dispute with your builder. An experienced interior designer should be able to administer the terms.

www.collierscre.com

Classifications

The Use Classes Order, as it relates to hospitality premises, is set out in the Town and Country Planning (Use Classes) Order 1987 and its amendments

  • A3 Restaurants, snack bars and cafés where food is to be sold and consumed on the premises
  • A4 Drinking establishments, including pubs and wine bars
  • A5 Hot food take-aways where hot food is to be sold and consumed off the premises
  • C1 Hotels and guesthouses
  • D2 Assembly and leisure - Cinemas, music and concert halls, bingo and dance halls
  • Sui Generis includes nightclubs and casinos
  • Note: A4 and A5 premises can be changed to A3 usage without planning permission. Properties classed as Sui Generis require permission for any change of use.

Tax

One area that often gets overlooked or addressed too late during a refurbishment is the tax implications - and this can prove to be a costly oversight, says Graham Morgan, partner in charge of corporate and business tax at chartered accountants Kingston Smith. He advises operators to factor in tax from the outset.

Morgan explains that money spent doing up a property is treated very differently for tax reasons, depending on whether it is judged to be capital expenditure, which ends up on the balance sheet, or revenue, spent on repairs. As the latter is 100% tax deductible it naturally pays to get as much of your spend as possible treated as revenue.

Tax is also important when it comes to buying a property. The larger the amount of the purchase price taken up by fixtures and fittings, for example, the less tax you will pay. This is worth bearing in mind when negotiating a purchase as, at times like these, when vendors are keen to sell, there may be scope for negotiation.

www.kingstonsmith.co.uk

Regional spotlight - Yorkshire

As elsewhere, the economic downturn and factors such as the credit crunch and the smoking ban have led to a drop off in trade and the number of buyers but, says Simon Hall, director at the Fleurets Leeds office, for those with the money to buy, now is "without doubt" a good time to do so.

"It is not just the price of properties on the market, it is the fact that some types of properties are available at all," Hall says. "Go back two years and an individual wishing to get on to the high street or buy a wet-led freehold pub just would not have been able to do so. Now they are available, so take the chance while you can, ride out the dip in the economy, and be ready for the good times when they come back."

Hall recommends considering lower-level options - for example, a three-star hotel instead of a four-star, or a conventional pub instead of a gastropub, as cash-strapped consumers look to tighten their purse strings. "I would also advise that you buy something you will be confident in running without too many changes," he adds.

Hall advises that freehold pubs in the county can now be had for £250,000 to £450,000 as a going concern. But leaseholds are where the real bargains are to be had as keen-to-move vendors will now take £50,000-£60,000 - about half what they were asking a year ago.

In contrast, guesthouses and small hotels have held their value better, and the vast majority of leasehold restaurants are being sold for about £50,000 (or £500 per cover) depending on location.

At the Leeds Office of property agent Christie & Co, the team has seen a "definite softening" in the commercial market since March.

"While some buyers are increasingly faced with a difficult financial market and are simply unable to buy, there are still plenty of prospective purchasers who have finance available and are ready to buy and we know where to find them," says Steven Fidler. "To enable a sale to take place, vendors need to be realistic on price - and when they are, transactions will happen."

Christine Cody-Owen says the hotel sector has become "highly segmented", with demand falling away from the typical lifestyle businesses and the smaller B&B guesthouses, which closely follow the residential trend.

www.fleurets.com / www.christie.com

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